VC Funding vs. Bootstrap for Software Startup?

And here is why

Airbnb founders couldn’t raise money at first. So they started selling Cereals and made $30k to build an initial product version. Only after having first users they were able to raise VC capital.

Airbnb Humble Beginnings

Before starting Stripe, Patrick and John bootstrapped and sold a successful startup for $5 million. This track record allowed them to get quick seed funding for Stripe.

ClickFunnels founder Russel Bruson started his entrepreneur career with a tiny software called ZipBrander, which he built with a few hundred dollars by hiring a remote freelancer. Every Russel’s software product was bootstrapped and grown by reinvesting. Including ClickFunnels…

Swedish entrepreneur Daniel Ek sold his online marketing agency and re-used the money to build and launch an initial version of Spotify.

Investors rejected Reid Hoffman multiple times with his first software ideas back in 1997. So he grew his career within Apple, Fujitsu, and later Paypal. Then he returned to the startup world and bootstrapped LinkedIn. His track record allowed him to grow LinkedIn fast and get VC money.

Mint.com founder left his tech position with savings for over one year in his pockets. He closed himself in the room for nine months and built an alpha version on his own. Only then did he have partners joining in and getting VC money.

In 1994, Jeff Bezos’s parents invested in his idea $250k, which was a good part of their life savings. In 1995, when sales went up, Amazon got its Series A funding.

Houzz, the world’s leading home design platform, started by a couple in 2009 as a side project. Adi and Alon spent their own time and money and turned it all into a successful business. Their first 2 million in VC money they got in 2010.

You know the Facebook story, right?.. it was bootstrapped as a college network for students…

37signals (web development agency) started project management software named the Basecamp while still doing client projects. Now it’s a multi-million product business with over 3 million paid accounts. They never looked for professional funds.

For two years, Larry Page and Sergey Brin were prototyping their algorithm for a web search named PageRank, which yielded much better results than Yahoo. Only then in 1998, they were funded for the first time.

I can go on with more examples, but you probably got an idea…

After researching tons of startup stories, I was impressed…

Most famous unicorn multi-billion tech startups were bootstrapped!

Most of them had humble beginnings.

Some founders did it all by themselves, while others had some savings to build an initial software version.

Also, some of them built their initial product version in a way that didn’t require actual technology in place.

And then, once they sold their idea, only then they reinvested first money to build software.

Yes, few of them were lucky to get some initial funds from seed rounds. Little money, $20-50k to build an initial product version and gain some traction.

And, if you research a bit deeper, those few lucky founders were not doing it for the first time… Most of them had something to show to investors from their entrepreneur history.

Boom is gone

It was never easy to get money from professional investors…

Yes, it was a bit easier a few years ago when venture capitalists competed to fund tech startups. But even then, it was quite a challenge, and only a small percentage of ideas were funded.

Now, the unicorn bubble is bursting.

You will spend years trying to sell your idea to investors having only a startup pitch deck on your hands.

All these agencies selling pitch deck services for $30k are still doing pretty good. I’m so impressed by how many startup newcomers are so naive and believe they can raise it with awesomely designed 12 slides…

Investors don’t invest in the next cool idea.

They invest in two things:

Startup Traction (E.g., revenue, paid users, some interest, and support from users).

and Founders track record

If you already built an MSP and make money with it, then your chances grow exponentially.

Or, if you are, let’s say, Stripe founder and now want to build another thing, whatever your idea is, you’ll have a line of investors willing to put their money on the table.

In other words, they invest in results and actions. Not in ideas.

That’s precisely why, in our software acceleration program, we include a good bunch of development hours. So that students graduate with a working prototype to show to potential clients, partners, and investors.

Just an idea, even with a well-defined product strategy, won’t make it. You need something to show for real. Something that works.

Makes sense?

Instead of deciding whether to raise VC money, you need to do this:

Start lean and do whatever you can with your own resources.

Then, when you cross the pre-revenue stage or at least get first free users, decide whether you want/need an investment.

VC money needs to be optional for you. To speed up your growth.

VC money comes to those that will succeed with them or w/o them.

VC money needs to be considered as a growth strategy, and not as the only option for a business to survive.

So it all comes to two questions now:

Question #1: Is it possible to raise VC at the very beginning of your software journey?

In 99% of cases, NO.

If you have no track record as an entrepreneur and have only pitch deck to show to investors, forget about it.

It’s much easier to sell anything to anybody than just an idea to professional investors.

And don’t just get my word for it. Here is what Russel Branson, ClickFunnels founder responds to those seeking for investment:

“Don’t take VC money… boot strap it. Sell something, then re-invest that back into advertising…”

Question #2: Do I really need VC money then?

Now, after you got some traction, users, and revenue…

This is the point where you can go back to this question for the second time.

And here you’ll have two options:

Start a bit slower, grow organically, and re-invest back all your profits.

Keep full control of your company and worry only about satisfying your customers.

And eventually, benefit from all the fruits at the end. 100%

Or, instead, as a second option, you can take a $10 million check from VC…

Just remember, the moment you cash it in, you owe them 10x of that — $ 100 million.

Then, you also lose part of your company control and now need to worry about investors and customers.

What is even worse, investors need to be put first.

Both options are okay…

But the moment you start making revenue with a just-launched product, you’ll be much more hesitant to take VC money 😉

And the rest I’ll leave up to your personal preferences, goals, and vision…

Homework

Now, the next steps will help you get a bit better picture of raising money:

Research further on your software idea and find out how much it might cost to build an initial version

Give it another thought on raising money. Is this sum so big? Could a few months savings (or a fraction of your salary) do the work for humble beginnings?